Who Pays for the Massive Oil Spill Clean-Up in the Gulf?

May 7, 2010

By Terry Smiljanich:

The on-going tragedy of the massive oil spill in the Gulf of Mexico, caused by the catastrophic destruction of British Petroleum’s (BP) Deepwater Horizon drilling platform, has raised serious questions concerning legislative protections afforded to companies causing such environmental disasters. How will such legal limitations on liability serve to protect BP from being responsible for full compensation to the victims of this man-made calamity?

Oil Pollution Act of 1990

After the 1989 Alaskan oil spill caused by the Exxon Valdez, Congress passed the Oil Pollution Act of 1990.The Act increased federal oversight of maritime oil transportation and drilling, increased safety standards for such activities, set liability standards for such spills, and activated a trust fund to help pay for cleanup costs resulting from oil spills.

Responsible parties for causing such oil spills were made liable for removal costs and damages resulting from the incident, including economic losses resulting from damage to natural resources such as fishing and recreation. There is no liability for removal costs or damages if the spill incident is caused by an Act of God, an Act of War, a third party, or any combination of them.

As a trade off for requiring the creation of an industry-funded oil spill trust fund, responsible companies were provided a limitation on their liability for such removal costs or environmental damages. Such liability limits were set at $75 million.

Are such liability limits sufficient to protect the public? Obviously not. According to a study conducted by the Department of Homeland Security last year, since 1991 there have been 51 spill incidents in which the damages exceeded the liability caps. The potential damages resulting from the BP spill are already estimated at $1.6 billion, and this figure could rise further. Even at $1.6 billion, such damages exceed the current cap on BP’s liability by more than 20 times.

If, however, claimants can prove gross negligence by the responsible party (a much higher standard of proof), the limitations on liability would no longer apply. It would be up to courts and juries to make such findings and allow higher damages to be awarded beyond the $75 million total cap.

Oil Spill Liability Trust Fund

In 1986, Congress had created a trust fund, the Oil Spill Liability Trust Fund, to be paid for by the oil industry to provide contingency funds for clean-up and damage costs resulting from oil spills. This trust fund remained unfunded, however, until after the Exxon Valdez incident. In the Oil Pollution Act of 1990, the oil industry was required to put $1 billion into the trust fund, based upon a new tax (currently 8 cents per barrel). This reserve fund currently stands at $1.6 billion.

These costs on the oil industry are, of course, passed on to the consumer. It is estimated that the tax to cover the Oil Spill Trust Fund increases the cost of oil by about one tenth of a percent. Have no doubt about it, readers, but we consumers are the ones who actually paid for the $1.6 billion currently sitting in the fund. Meanwhile, BP’s profits just for the first three months of this year stand at $6.1 billion, after posting profits of $4.3 billion in the final quarter of last year (that’s not a typo).

BP’s Liability

BP’s CEO Tony Hayward announced that “this is not our accident, but it’s our responsibility.” BP has stated that it will pay “all necessary and appropriate clean-up costs,” and will pay compensation for “legitimate and objectively verifiable” claims for property damage, personal injuries and commercial losses.

If BP holds true to its word, the government will be compensated for its clean-up efforts and the Oil Spill Liability Trust Fund will remain intact. There will undoubtedly be clean-up costs and liability claims that BP will dispute, and such disputes (given the example of the Exxon Valdez incident) will take decades to resolve.

If the oil slicks damage the sensitive wetlands of Louisiana, the rich oyster beds of the Gulf Coast and the coral reefs off of the Dry Tortugas and the Florida Keys, no amount of money in the world will compensate us for our ecological and economic losses. Such are the risks that need to be weighed against our overweening thirst for oil and desire to “drill, baby, drill.”